Those wishing to invest free funds have a choice of financial instruments, from the most popular bank deposit to investing in the stock market. If you do not have time or opportunity to monitor financial markets every day, then you should consider the option of investing funds for the long term. You can independently analyze the market and purchase shares through a broker, contact a mutual fund or buy index funds.
Definition
Index Investment Fund (ETF) is a portfolio of securities that form the backbone of any index. Stock indices are relative indicators, which are formed from the value of securities of "blue chips", that is, the most developed companies in the country. They show the economic situation in the domestic market. Such indices exist in every country. In the USA, this is the S&P 500, in Germany - DAX, and in Russia - RTS and MICEX.
Index funds follow the structure of the underlying index. It includes stocks of a certain country, region, price, or they are grouped by companies that produce the same goods. Their shares can be bought and sold all day long. The manager's commission is 0.5% of the value of the assets. This is the main advantage of ETF over mutual funds.
The MICEX index includes shares of 45 largest companies. The specific gravity of each is determined in proportion to capitalization, but cannot exceed 15%. The largest companies are concentrated a huge share of human labor. From it, the value of the shares is formed. The average stock return is 5% faster than inflation. Against this background, speculative techniques are more effective. But in the long run, in the context of interest capitalization, a small income will allow you to get a good financial result.
Statistics
The first ETF called TIP 35 was listed on the Toronto Stock Exchange in 1990. Following in 1993, the American SPDR S&P 500, originally called SPY, and the NASDAQ-100 appeared. In the 2000s, the investment market was booming. Today there are 4724 investment funds. Their total assets amount to $ 2.867 trillion, of which $ 127 billion is accounted for only by the S&P 500. Index funds in Russia first appeared in 2013. Then an ETF under the name FinEx was listed on the Moscow Exchange. In Russia, ETF circulation is regulated by the Federal Law "On RZB". Active growth in ETF trading volumes began in 2013. Due to the fact that investors transferred funds from mutual funds to ETFs, the annual trading volume exceeded $ 2 trillion, an increase of 27%.
ETF VS MIF
Stock index funds are similar to mutual funds according to a number of criteria:
- Professional management (a mutual fund is managed by a manager, and ETF is a company that invests money in it).
- Low entry threshold (in the ETF, the minimum contribution is limited by the value of one share, in a mutual fund - the minimum amount is set by the sales agent).
- Diversification of assets.
ETFs differ from mutual funds in such parameters:
- High liquidity. ETFs can be sold and bought throughout the day.
- The price of a unit investment fund unit is calculated based on the results of the day at the value of net assets. The price of an ETF changes every second.
- Units of mutual funds cannot be bought for credit money. You can use leverage in ETFs.
- Mutual funds can be traded in only one country, and shares - on any exchange.
- For mutual funds, unlike ETFs, commissions may be provided.
Market structure
The market for index funds is divided into primary (issue and redemption of shares) and secondary (circulation of shares). Access to the primary market is restricted to authorized users. They initiate the issue of shares, that is, exchange cash for shares, and carry out the reverse procedure - repay the issue. Shares are redeemed in units of 50 thousand shares. Already in the secondary market, legal entities and individuals carry out transactions of purchase and sale of securities.
Legal framework
In the United States, index investment funds are governed by the 1940 Act, which dealt with open mutual funds. Although the ETF does not fulfill a number of mutual fund functions. Sometimes they are created in the form of an investment trust and then registered through the SEC.
European funds operate on the basis of the UCITS Directive, adopted in 2009. Their features: openness to all investors, strict regulation of assets and information disclosure procedures. At the same time, a foundation opened in Luxembourg or Ireland may apply throughout the European Union.
Features of functioning
Let us consider in more detail how the stock exchange index funds are arranged. First, a company rarely invests all funds received from an investor in assets. Most often, 5–10% of attracted funds are used to purchase futures for assets that repeat the index. The remaining 90% of the company may dispose at its discretion. But she is obliged to return the investment on first demand, taking into account the promised level of profitability. That is, the ETF does not use its funds.
Secondly, most of the funds do not own the Central Bank at all. They synthesize index behavior. For this, a cash flow exchange agreement is concluded with the bank. The credit institution is obliged to ensure the profitability of the index, for which it receives profit from the assets of the fund. 90% of funds are invested in such a virtual portfolio. If the index has brought more income than the portfolio of the Central Bank, the fund receives compensation from the bank. In the opposite situation, he himself pays the difference to the bank.
Banking risks
The danger is that index funds cannot deviate from the index. Acquiring all the stocks that are in the index is expensive. Each manager tries to generate his portfolio and does not always make an adequate replacement for the Central Bank. It was said earlier that not all companies invest in stocks. Some synthesize the index through bank deposits. Such investments are similar in structure to credit derivatives. They also contain hidden risk. If the bank goes bankrupt, then 10% of the collateral will be immediately lost. The rest of the investor will be able to receive in the form of treasury bonds.
Issue price
I.e. To create an ETF that repeats RTS, you need to buy index futures. Mutual index funds are cheaper than the assets they repeat. In the case of buying an asset, you would have to pay $ 3,000, and when buying a futures - $ 300. The remaining funds can be placed on deposit.
The duration of the futures is limited. For example, for RTS it is three months. That is, 4 times a year you need to transfer the position - change one futures to another. Index funds conduct this operation without investor participation. For one transaction, the exchange charges 2 p. The fund needs to buy and sell futures. That is, the commission will be 4 p. or 0.044% of the investment. For the year will have to pay 0.17%. Only liquid assets are worth transferring. And not every index has futures. That is, to repeat the position, you need to buy several contracts at once or acquire the Central Bank on several exchanges. This increases costs.
The account balance of the futures owner changes every day depending on the dynamics of the price. Decreasing collateral below the established level leads to the fact that the investor must deposit the missing amount, otherwise his position will be forcibly closed at a loss.
Index fund strategies should also provide for different deadlines for contract execution. Amid rising prices, the new contract will cost more.
Investment risks
With the “correct” formation of the fund, only those instruments that are included in the index, and in the ratio that is inherent in the index, should be purchased. The first problem. The manager must acquire shares of companies for which growth is not expected in the next 2 years, only because they are present in the index. The second problem. If a company begins to grow and shows positive dynamics in the market, then the manager cannot purchase the shares of this company more than their share in the index. Moreover, when the Central Bank rises in price and the company's share in the index exceeds the maximum value, the manager will have to sell these Central Banks.
The bond index fund is unmanageable. To all other financial institutions, a risk management methodology is applied that limits market presence and losses. In the case of an index fund, you watch how money decreases after a decrease in the index.
How to choose a fund
The first thing an investor should decide is which index to invest in. Without competent technical and fundamental analysis, dealing with this issue will be difficult. Index funds work with stocks, bonds, the commodity market and even real estate. The US PowerShares DB fund tracks the change in the dollar against the euro, the yen, the pound, the kroon and the franc. Based on the data received, the USDX index is formed. The United States Commodity Index tracks commodity futures, while iShares Global Real Estate copies the Cohen & Steers Global Realty Index. It is better for a novice investor to master the popular S&P 500 or MICEX indices. It is easier to collect information from them and easier to compare statistics.
When choosing a fund, you need to pay attention to two criteria: the size of the commission and compliance with the index. The larger the fund, the less likely it is to quickly go bankrupt. General information on Russian funds and mutual funds is available on the website of the National League of Managers. Although, by law, all funds are required to regularly report on the results of their work, after choosing a specific organization it is still worth checking the financial statements on the fund's website.
It is also important to pay attention to the minimum deposit. You can become a participant in VTB - MICEX Index for 5,000 rubles, and BKS - MICEX for 50,000 rubles. Russian funds charge higher commissions than American. The amount of remuneration includes the commission of the fund, depository, auditor, registrar, appraiser and those expenses that are subject to reimbursement. Their maximum size is spelled out in the contract itself. For example, at VTB it is 3.7%. Only after a detailed analysis of all the information should a decision be made on how to invest.